One of the things that can make understanding investment returns hard to decipher is when return periods are “cherry picked”. This means that if the last quarter was strong, but the prior year was weak, returns will focus on the past 90 days, and deemphasize the prior 365. For example, the first quarter of 2023 has seen a 7% increase in the S&P 500, a common market benchmark. The one year return for the S&P, however, (4/1/22 to 3/31/23) is down over 11%. As you can tell, very different stories can be told depending on when the narrative begins.
Given that explanation, this quarter we actually want to look back 3 years to March 2020, which we now realize was the very early stages of the pandemic. We look back to this date not to merely show a strong return period, which it happens to be, but because we think that after a volatile three years, the economy may now be positioned to start a longer recovery.
After a very bad month of March, 2020, since 03/31/2020, the S&P 500 has roared back nearly 64%. On an annualized basis this is more than 20% increase per year, for three years. This sounds good, but we are then reminded that the high point of the S&P 500 was way back in December of 2021.
So, why is all this history relevant to our first quarter 2023 market update?
The answer is, the market does not always tell the whole story. And, our position is that while we are happy the market has gone up over the past several months, we still think there are more questions than answers for what will happen in the short term. If the economy was a 400 page mystery novel, we believe we're probably around page 300 right now. A lot of clues have been presented, but it is still too early to tell which are red herrings and which are going to actually help the protagonist crack the case! That being said, and to mix metaphors, we think we may be starting to see the light at the end of the tunnel.
Our market updates for the preceding two quarters discussed two ideas that we think are finally coming to a head today. First, at the end of September we suggested that we would not have any additional clarity about the economy for at least 3 to 6 months. Then in December we asked whether the end of 2022 marked the end of a year long bear market or the midway point in a longer period of market weakness. While we still do not know, we do take comfort in a number of strong economic factors we are seeing today. The Fed has raised its target rate to 5%. Unemployment remains low. Consumer confidence has begun to rebound. And, it appears that the uncertainty in the banking industry has subsided for the moment.
While not all good news in itself, we believe these factors begin to create the opportunity for a longer term and sustained market rebound. However, we do not make this assessment without commenting that there remain a number of economic and geopolitical factors that could very abruptly cause us to reevaluate this position. Nor do we suggest that the next three years will be as robust as the prior three.
Slow and steady wins the race. Volatility in either direction is likely to bring about an equal and opposite reaction, and we believe that for our clients, the easiest and best way to manage their portfolios is by staying the course and maintaining discipline. A dislocation, like the one we saw in 2020, meant that investors who panicked likely missed out. It is only several years later that the effects of the drastic actions taken at the onset and midpoint of the pandemic are beginning to work themselves out.
This may be the rosiest market update we have written in a while, and we remain cautiously optimistic. We do not think we are overreacting to positive signs, but as the Minnesota winter always reminds us, there could be some additional trouble before spring really emerges!
-Open Door Financial
Always consult a financial, tax, or legal professional familiar about your unique circumstances before making any financial decisions. This material is intended for educational purposes only. Nothing in this material constitutes a solicitation for the sale or purchase of any securities. Any mentioned rates of return are historical or hypothetical in nature and are not a guarantee of future returns. Past performance does not guarantee future performance. Future returns may be lower or higher. Investments involve risk. Investment values will fluctuate with market conditions, and security positions, when sold, may be worth less or more than their original cost.